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A number of factors can lead to your mortgage application being rejected. So-called “unverifiable income” is one of them.
Mortgage lenders want to know if you are financially able to repay the loan. One way they can do this is to request documents such as federal income tax returns, W-2s, and current pay stubs, according to Freddie Mac.
Any money you earn that isn't tied to a form like a W-2 or 1099 can make it difficult for a lender to verify your annual income, said Jacob Channel, an economist at LendingTree.
For example, it may be difficult for a mortgage lender to verify the income you earn from a rental property you own. The same can be said for things like money gifted for a down payment or side earnings.
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It's a more common problem than you might expect.
About 12% of potential home buyers were recently denied a mortgage because the lender couldn't verify their income, according to the National Association of Realtors' 2024 Home Buyers and Sellers Profile report.
NAR surveyed 5,390 buyers who purchased a primary residence between July 2023 and June 2024.
In such cases where you have different forms of income or are self-employed, it may be worth considering non-traditional mortgage options, said Melissa Cohen, regional vice president for William Raveis Mortgage in New York.
“The good news is that there are programs available for people who don’t traditionally qualify,” she said. “But it's a little more expensive.”
For example, you may have to maintain higher than usual mortgage rates.
Here's what you need to know.
How does a non-qualified mortgage work?
Some homebuyers who need more flexibility when applying for mortgages could benefit from a non-qualifying mortgage, or a non-QM loan, Cohen said.
These loans generate income differently. If you're self-employed, a non-QM lender can use bank statements to calculate income that might qualify for a loan instead of a pay stub, tax return or W-2, she says.
“They may also look at what type of assets you have,” Channel said.
Banks and other lenders will accept the most recent 1099 and not rely on tax returns if you are self-employed at a company you own, Cohn said.
But be careful. While it may be easier to qualify through income, such loans can be more expensive, said Brian Nevins, director of sales at Bay Equity, the mortgage lender owned by Redfin.
“You may have to jump through more hurdles to get those mortgages,” Channel said.
For example, you may need a higher credit score or you may be asked to make a larger down payment.
The loan may also come with a higher interest rate than a traditional loan. This is because non-QM loans do not follow the criteria for eligible mortgages set by the Consumer Financial Protection Bureau.
In the first half of 2024, the average 30-year initial interest rate for non-QM loans was 6.7%, compared to 6.4% for a qualifying loan, according to data from CoreLogic.
A “starting point” for unverified income
Non-QM loans are often better suited to those who invest in real estate or wealthy individuals with a number of assets, Channel said.
“In those cases, you can replace assets with active income,” he said.
Even if you suspect it will be difficult to verify your income, it's smart to start with traditional loan options.
He explained that if your application for a conventional mortgage is denied, contact your lender and ask them why they were denied.
“You may have filed a W-2 for the wrong year. Mistakes happen,” Channel said.
But if you're transitioning from employment to self-employment, or starting a new job with a new company, a non-QM loan can be a “starting point,” Cohen said.
Once you start showing enough income on your returns, you can always apply to refinance in the future, experts say.
“Just because you have a non-QM loan doesn't mean you're stuck,” Cohen said.
